The IRS issued final regulations on the premium tax credit created under health care reform. Beginning in 2014, individuals and families that meet certain low-income criteria may be able to claim a tax credit to help pay for health coverage purchased through an Exchange. The premium tax credit is refundable which means even individuals with little or no income tax liability can benefit from the credit. The credit may also be paid in advance to a health coverage provider to assist with the cost of premiums.
Employers should pay attention to the premium tax credit because if an employee receives the credit and purchases health coverage through an Exchange, the employer will be assessed a tax penalty (referred to as the "pay or play" penalty). An employer will not have to pay the penalty, and an employee will not be eligible for the premium tax credit, if the employer offers a health plan with "minimum essential coverage." An employer's plan will meet the minimum essential coverage requirement if it is deemed affordable and provides minimum value. Refer to our Newsletter dated May 3, 2012 for a discussion of minimum value.
The new regulations focus on technical issues relating to eligibility for and calculation of the tax credit.
- The affordability safe harbor applies only until the availability of employer sponsored coverage changes. If new or different coverage becomes available after enrollment in a plan through the Exchange, the individual must notify the Exchange.
- Determination of affordability is based on self-only coverage. An employer's plan is unaffordable if the employee's cost for self-only coverage exceeds 9.5% of the employee's household income for the year.
- Employer contributions to HSAs do not affect the affordability calculation.
- An individual who enrolls in an employer plan is not eligible for the tax credit, even if the employer's plan does not provide minimum essential coverage.
- An individual may be eligible for the tax credit during a waiting period for eligibility in an employer-sponsored plan.
More guidance is expected on the premium tax credit and the applicability of the credit at all will be determined by the Supreme Court's decision on the constitutionality of health care reform.